Recent Posts

It may sound too good to be true: one of the headline findings of the recent survey of academic literature on ESG put out by Deutsche Bank Climate Change Advisers is that in over 80% of studies, strong ESG performance by a company correlates with financial outperformance. Digging into the details confirms that this is in fact the case—but it doesn’t mean that ESG analytics alone will make an investor rich. Instead, the study confirms many of the points I made in a report I wrote for GMI Ratings early last year, entitled “Ten Things to Know About Responsible Investment.” Sometimes, ESG factors do flag a material risk or opportunity that the market has not yet perceived, but will soon—in those cases, ESG can give a boost to active management. In other cases, while ESG factors are relevant to stock valuations, the market has already realized this and priced it in; this mean that active investors would have to detect changes in ESG performance ahead of the market in order to outperform. Moreover, many ESG factors affect certain industries more than others (e.g., consumer-facing industries are more sensitive to social issues, and industrials to environmental ones); some ESG factors have an effect only over the medium-to-long term, which makes them more or less relevant depending on an investor’s time horizon; and for a variety of reasons, strong ESG performance can sometimes have an effect on operational performance, without affecting the stock price. All this nuance, however, simply confirms the main finding that strong ESG performance is by and large good for companies and their investors. This isn’t surprising to those of us in the field, who have always seen ESG as a proxy for good management in general. But it’s nice to have the academic experts back us up.